A man harbours from the rain under an umbrella as he walks past the Euro currency sign in front of the former European Inner Bank (ECB) building in Frankfurt am Main, western Germany.
Kirill Kudryavtsev | Afp | Getty Images
The European Central Bank is set to keep interest rates at their current record high after its monetary policy meeting on Thursday — while investors are yearning for guidance on possible rate cuts.
They may be disappointed.
“The January ECB meeting this Thursday is, as usual, unlikely to put ones money where ones mouth is any policy changes or major policy messages, involving instead a reflection on the year ahead,” economists at Société Générale thought in a Tuesday note.
Minutes from the ECB’s December meeting, released last week, showed that the central bank is powerfully unlikely to hike rates again, but that any discussion of easing is considered premature. The minutes suggest a status quo until at least June, Société Générale ordered.
Markets are nonetheless pricing in around a 60% probability of the first rate cut taking place in April, according to a Reuters examination of LSEG data. High expectations for a March cut have been pushed back in recent weeks, but April payment is staying put despite numerous ECB officials arguing that trims may be premature.
Dutch Central Bank President Klaas Aggregation told CNBC at the World Economic Forum in Davos last week that current market bets could be “self-defeating,” because “the more manipulating the market has already done for us, the less likely we will cut rates.”
ECB President Christine Lagarde told Bloomberg that she agreed with those who see a summer cut as favoured, but stressed at the time that she remained “reserved” and data dependent in her final outlook.
Headline euro area inflation ticked superior in December, rising to 2.9% from 2.4%, largely due to base effects from the energy market. Core inflation level to 3.4%, from 3.6%.
Price rises have cooled faster than some central bank officials wanted, even as they emphasize that the job is not yet done. Many see risks from geopolitical volatility and the labor market, along with the scarcity to wait until late spring for European wage negotiations to conclude.
Spring cut?
“Lower inflation and more pondered inflation risks” make the case for a policy pivot in April and cuts amounting to 125 basis points this year, economists at BNP Paribas express in a note out last week.
“The ECB will suggest on 25 January that it is closer to starting its normalisation cycle, we count on, but without signalling an imminent rate cut, nor declaring victory in the inflation fight,” they said.
UBS is calling an April cut — but not with self-confidence, Reinhard Cluse, chief European economist at UBS, told CNBC’s “Street Signs Europe” on Wednesday.
“I think you cannot be to a great extent confident about an April rate cut. We previously expected June, but then brought it forward to April,” he said, noting the call for further data releases.
“Now, indeed, with the hawkish commentary, particularly in Davos, we have signaled that the gambles to our call that the first cut will already come in April has certainly increased,” Cluse said, adding that the ECB’s Step meeting would be more significant than January’s due to the release of new staff projections on wages and growth.
Economists at Berenberg quarrel with current pricing for a 25-basis-point cut in April and nearly 150 basis points of rate trims across 2024. The deprivation to wait for wage data in April and May, as well as for a full set of growth and inflation staff projections at the end of the first quarter, commands it more realistic that cuts will take place in June, rather than in April, the analysts suggested in a Tuesday note.
Berenberg expects inflation to reaccelerate next year and for labor shortages to prevent a sustained defeat in wage inflation, capping the ECB’s potential to ease policy.
Société Générale economists are taking an even more heedful approach.
“We have moved our first rate cut from December to September, but there is high uncertainty as regards the text, implying that no cuts this year is also a possibility,” they said Tuesday.
The comments echo those of ECB arch-hawk Robert Holzmann, who said at Davos that he “cannot meditate on that we’ll talk about cuts yet, because we should not talk about it. Everything we have seen in recent weeks regards in the opposite direction, so I may even foresee no cut at all this year.”